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FIN622 - Corporate Finance

PROBLEM:
ABC Company is considering the acquisition of a machine to improve its production. The company has to make a choice between two types of machine A and B. Each machine will have a 4-year life with no salvage value.
Cost of capital of the firm is 14%. Initial investments required to purchase and install the machines A and B, are PKR 28,700 and PKR 27,050 respectively. Machine A will generate an inflow of PKR 10,000 each year while Machine B is expected to generate cash inflows in the following manner.


Year          Cash Inflows (PKR)
1               11,000
2               10,000
3               9,000
4                8,000


Required:


Calculate NPV and IRR for both options. Which machine should be preferred and why?

Note:
For calculating IRR you are required to use “Trial and Error Method” along with “Interpolation Technique/Formula”. In this particular regard, you are advised to consult PPT slideshow “Finding IRR is no more difficult” uploaded in the lesson contents of Lesson # 10.

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Replies to This Discussion

g han B to sab ka e preferrd a raha hai mujy laga ap A ka bolo ge

FOR MACHINE A

 

 

TIME

CASH FLOW

DISCOUNTED CASH FLOW (10%)

DISCOUNTED CASH FLOW (20%)

00

-28,700

-28,700

-28,700

01

10,000

9,090.90

8,333.33

02

10,000

8,264.46

6,944.44

03

10,000

7,513.14

5,787.03

04

10,000

6,830.13

4,822.53

NPV

11,300

2,998.53

-2,812.67

 

IRR = a+ [{A/ (A-B)} * (b-a)] %

IRR = 10 + [{2,998.53 / (2,998.53 + 2,812.67)} * (20-10) %

IRR = 10 + {(2,998.53 / 5,811.2) * 10} %

IRR = 10 + (0.51 * 10)

IRR = 15.1 %

Using same procedure, go for machine B as well

And Final Decesion is

v  NPV prefers “Machine B” to “Machine A

v  IRR prefers “Machine A” to “Machine B

wah g wah paki pakai kheer he day di hai

:) Ta k smjh aa jae na :)

gud

Machine B

npv 10950

10d.f=7818.5

20per =1426.01

mara Irr =10.122

aa raha  ha kaya ya thek ha?

plzzzzzzzzzzzzzzzz help me

bhi tell me 

 

Machine B

npv 10950

10d.f=7818.5

20per =1426.01

mara Irr =10.122

aa raha  ha kaya ya thek ha?

plzzzzzzzzzzzzzzzz help me

Ni Azmay U Are Wrong. IRR me Hm NPV DF ko Nil Krna Hota Ya -ve Me Krna Hota. agr 10 d.f pe 7818 hai to 20 pe usy 0 ya -ve hona chahye. as I Shown above

IRR also prefer B to A 

because IRR of machine A = 15.1% and IRR of machine B = 16.4 % and both are greater than 14%. So we should prefer machine with higher IRR.

what u say???

Fahad

You are right, higher IRR will be preferred like higher NPV. Onething more...which machine have less/more initial investment, also consider this factor also.

 

Onething more...which machine have less/more initial investment, also consider this factor

please explain???




Look I am writing in a general way

You have two options to invest, 100 Rs and 150 Rs

100 give you low NPV/IRR and 150 give you higher NPV/IRR

but you will also compare the size of investment ke aap ke 150 hai b ke nahi.

you can ignore this factor for the current discussion.

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